Companies are taking less office space across the nation, driving down rents in most markets and causing pain for real-estate landlords. It is also making it easier for businesses to rent space.

Nationwide, rents on office properties -- including landlord concessions and discounts -- rose 0.7% in the second quarter to $25.16 a square foot, the slowest growth since the second quarter of 2005, when the office market was just emerging from a half-decade-long slump, according to Reis Inc., the New York real-estate research firm.

With inflation running roughly 1% a quarter, that rent growth is effectively wiped out. "Landlords are having to concede ground on rents and tenant improvements," says Sam Chandan, Reis's chief economist. "The balance is tipping in the favor of tenants in many markets."

Coupled with recent negative economic news, the decline in the office market is a further signal that the nation's economy is on the skids. For the second quarter in a row, businesses vacated more office space than they took nationwide, a phenomenon known as negative absorption. The national vacancy rate edged up to 13%, from 12.8% last quarter.

Even some of the strongest markets are feeling the pain. New York, which had double-digit rent increases in 2007 saw rent growth slow to 0.7% in the second quarter as financial firms slashed jobs. Big firms such as J.P. Morgan Chase & Co. and Lehman Brothers Holdings Inc. have put huge chunks of office space on the so-called sublease market, which adds to supply and depresses prices.

Some tenants are postponing leasing decisions because they see rents dropping. Others are concerned about making long-term commitments with the economy getting shaky. "Tenants just don't have the ability to finance major relocations, construction costs and all the things involved in moving," says Peter Riguardi, president of the New York branch of brokerage Jones Lang LaSalle. "They have the same capital issues that landlords have."

The worst-hit areas of the country in terms of office space are those whose local economies are reeling from the housing-bubble burst. Orlando, Fla., Atlanta, Phoenix, Las Vegas and Sacramento, Calif., all saw rents decline in nominal terms, without accounting for inflation.

Steven Roth, chief executive at office and retail landlord Vornado Realty Trust, warned last week at an event that inflation and the inability to keep interest rates low will slow any recovery in commercial real estate. "Inflation is an enormous issue," he said. He predicted "two years or more" before the cycle turns up again.

The decline in rents and increase in vacancy has provided a silver lining for businesses that buck the economic cycle: They can get space cheap. Apogee Interactive Inc., an Atlanta maker of energy-analysis software recently signed a lease to move its 25 employees.

"We found the new space in four hours," says Susan Gilbert, Apogee's chief executive. The landlord chipped in a generous allowance to fix up the space, and Apogee ended up paying around $4 less per square foot than it does at its current home. She said her broker, CresaPartners, negotiated with three landlords, "knowing full well we liked one of the spaces better."

Only 17 of the 79 markets Reis tracks saw rent growth outpace inflation. Among the leading cities was Houston, which benefited from the energy boom. Rents there increased 2.7% in the quarter to an average of $20.42 a square foot. Seattle and San Francisco also performed well. Los Angeles rents were up 1.4%, still healthy, but slower than the 2.8% growth it saw in the first quarter.

Some suburban office buildings are suffering from increased gas prices, as companies shift away from locating in places that require employees to drive long distances. In New York's Long Island, rents declined 0.3% last quarter. One owner there, Metropolitan Realty Associates, is passing out free gas cards to commercial brokers as an incentive for showing tenants its blocks of empty space.

"High gasoline prices make it increasingly expensive for the brokers to conduct business," says Joseph Farkas, Metropolitan's president. "Our offer provides them with a no-excuses opportunity to learn firsthand about the improvements we have made to our properties."

Write to Alex Frangos at alex.frangos@wsj.com

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